Fixed vs. Variable Annuities: Which is Right for Retirees?

Annuities are popular financial products that can provide retirees with a steady income stream. But choosing the right type of annuity is crucial. Two of the most common types are fixed and variable annuities, each with its own advantages and potential downsides. This guide breaks down their differences to help you decide which option best fits your retirement needs.

What is a Fixed Annuity?

A fixed annuity guarantees a set amount of income over a specific period or for life, depending on the terms of the contract. The interest rate is fixed and does not fluctuate with the market, making it a low-risk option for retirees who prioritize stability and predictability in their income.

Key Benefits:

• Guaranteed Income: You know exactly how much you'll receive each month, providing peace of mind.
• Low Risk: Because the income is not tied to market performance, there is minimal risk of losing principal or income.

Potential Drawbacks:

• Lower Returns: The guaranteed rate of return is generally lower compared to other investments.
• Inflation Risk: Over time, inflation can erode the purchasing power of the fixed income.

What is a Variable Annuity?

A variable annuity allows retirees to invest in a selection of mutual funds or other investment vehicles. The income you receive depends on the performance of those investments, meaning your payouts can fluctuate with the market. Variable annuities offer the potential for higher returns but come with greater risk.

Key Benefits:

• Growth Potential: Since payouts depend on market performance, there is potential for higher returns compared to a fixed annuity.
• Flexible Investment Options: You can choose where to allocate your investment, tailoring your annuity to your risk tolerance and retirement goals.

Potential Drawbacks:

• Higher Risk: With the potential for higher returns comes the possibility of lower returns or even losses, depending on the market.
• Fees: Variable annuities often come with higher fees, such as management and administrative costs, which can eat into your investment.

Which Option is Right for You?

Choosing between a fixed and variable annuity depends on your financial goals, risk tolerance, and overall retirement strategy.

• If you prefer stability and want to minimize risk, a fixed annuity might be the better choice. It offers guaranteed income and protects against market volatility.
• If you're comfortable with market risk and are looking for growth potential, a variable annuity could offer the flexibility and higher returns you're seeking.

Combination Strategy: The Best of Both Worlds?

Some retirees may find it beneficial to include both fixed and variable annuities in their portfolio. This approach provides a stable income stream from the fixed annuity while allowing for potential growth through the variable annuity.

Conclusion

The decision between fixed and variable annuities depends on your personal financial situation, retirement goals, and risk tolerance. Consult with a financial advisor to determine which option aligns best with your retirement strategy.